The Ripple Effects of War ft. Jacob Shapiro

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1:25Hi everyone and welcome to this deep dive on macro and geopolitics here at Real Vision. My name is San Andreas Dino, your host for the next hour. And I'm pleased to be joined by one of the best watchers of macro and geopolitics out there, namely Jacob Shapiro, head of geopolitics and macro at The Bespoke Group. Great to see you, Jacob. I don't know if I'm one of the best, but I did stay at a Holiday Inn Express last night, Andreas. Do you even have enough American context to understand that joke? Oh, to be honest, no. That's okay. The audience will get it. Yeah, hopefully they will. Um, Jacob, it's, um, it's, it's a massive backdrop in geopolitics that we're going to discuss today with everything ongoing in the Middle East.

2:09We have the election upcoming in the U S we have turbulence in Mexico and politics as well. So plenty of ground to cover here, but I'd like to start with the Middle East since it's basically the center of attention right now. Now, we're currently still awaiting the response from Israel after the rocket attack from Iran on Israeli soil a few days back. So please fill us in on the status right now. How do you view the situation? Is it going to escalate from here? What's your take? First of all, it's incredible that it's been a year since October 7th. That anniversary sort of crept up on me. So Israel has been at war for a year.

2:48And I won't say this is unprecedented, but this is not what the Israel Defense Forces has had its greatest success at. Usually it's short wars where they completely obliterate their enemies, and then they go back to being startup nation or running the economy or any of the things that Israel does. They've been at war for a year, and it looks like they're going to be at war for a lot longer. In terms of whether this escalates, that has been the question for literally a year, and it hasn't escalated. And it hasn't escalated even as Israel pushes more aggressively and harder against the enemies on its borders, whether that's Hamas in the Gaza Strip or Hezbollah in Lebanon.

3:23They're even striking targets in Syria or even going directly against Iranian interests. They even managed to hit the Houthis in Yemen, which is something I didn't think they were really capable of doing myself. And I think one of the things that we've seen is that Iran and its access of resistance is fairly weak. It looked early on in the conflict like they had Israel by the horns. And now Israel has said, OK, if you want to play that way, let's take off the gloves. We're going to see what you actually have. And Iran and all of its little proxies are scurrying all over the place. We also have, you know, in the last couple of months, Iran had a president who mysteriously died in a helicopter crash, is going through a domestic political transition of its own, and is isolated from, you know, the Sunni Arab states that are all around it.

4:09So you put all this together. ironically, Israel's in the driver's seat here. So all the escalation that we've seen so far has been because Israel wants there to be escalation. So the question here is how far does Israel go? And I have to confess to you, I've been wrong about this for the last eight to nine months, because I thought there was going to be a really, really intense sort of three, four month period, and then Israel would have to dial it back. That's not what they're doing. They have basically obliterated the Gaza Strip. They have completely decapitated Hezbollah with all sorts of scary and new techniques and technologies that for me open up a can of worms in sort of general global politics.

4:45And then they're starting to hit it at Iran directly. So do I think that there is an escalatory scenario coming? I don't think it's World War III. I don't even think it's regional war. I really think the question is how far is Israel going to go? And right now it seems like they're going to go pretty far. It seems like they're not going to stop at least until they feel like they've decimated Hezbollah. And maybe they're going to try and go after Iran's nukes too. This wouldn't be the first time that they struck nuclear facilities of an enemy state in the Middle East. Maybe they feel like they have to do that as well.

5:14So Jacob, I suppose that you saw this video from Benjamin Netanyahu on X. I think it was out a handful of days ago on, where he basically addressed the Iranian people, telling them to stick with Israel in this fight against the Shia Muslim powers of the region. How did you sort of view the message from Benjamin Netanyahu? Was that sort of a sign that Israel could attempt to go further than what you had envisioned just a few months ago? Well, if I was the Supreme Leader, I would have thrown out my beeper and my pager and my walkie-talkie and my cell phone and my laptop after watching that video.

5:57So, you know, it's I think that Netanyahu is probably fronting there. I don't think that he really has anything to stand on. But he is right that Iran is a theocratic state. It's an authoritarian state. It has a large population that does not necessarily think that way, that does not think of Shiite fundamentalism or think that the Islamic Republic is the greatest thing that was ever invented in the history of the world. One of my favorite anecdotes about this was when Game of Thrones was really, really popular in its early seasons. Iranian students were having Game of Thrones filming or watching parties in the streets of Tehran near the universities.

6:36And the police had to come in and break them up. So there is a young and liberal-minded and open group or group, like section of the Iranian population that is probably not happy with the way things are going. The flip side of that is the Iranian government has the guns and has the power. And they have shown the ability to crack down on any and all dissent. So there's no number of pagers or walkie-talkies or even airstrikes that is going to get the Iranian people to go out and throw down their own government. And if Netanyahu is thinking that's what's going to happen, I don't know, maybe the Mossad has better intelligence than I do.

7:10But that to me seems to be hyperbole. That's going to be in the hands of Iran itself. Now, the thing that Israel can do, and by going after Iran the way that they have, they've this a little bit, they can show how empty the promises of the Iranian regime are. They can discredit the Iranian regime to its own people. They can say all of this foreign adventurism, all this money that is being spent on the Houthis and on Hezbollah, what is that doing for the average Iranian person? Maybe that moves the dial a little bit. But ultimately, I don't think the Iranian people are going to rise up because Benjamin Netanyahu gives some kind of speech.

7:44So Jacob, we've seen a response from oil markets over the past couple of weeks to this turmoil. And I guess the big question now that we are one year into this conflict is whether there is a path to a deal between Israel and, for example, Saudi Arabia, despite turbulence in Gaza and in Lebanon still. So how do you view the ongoing negotiations, if there are any, between between Israel and Saudi Arabia surrounding a peace deal and potentially a deal that also includes added oil to oil markets. Yeah, so it only took us about eight minutes to get to the political landmines in the conversation. So people have really strong opinions about Israel-Palestine.

8:25I'm going to piss all of them off with what I'm about to say. And I know that I'm doing my job right because I get it from both sides whenever I talk about this thing. The dirty little secret about the Middle East is that no one cares about the Palestinians. Not the Arab states, not the Palestinian leaders, not the European Union, not the United States, not the American left. They don't care, period. Because the Palestinians have been betrayed and sold up the river by all of these people so many times over the past century that I can't even really count them. It's why I feel so bad for the Palestinians.

8:55No one is really sticking up for them. So your question was, is there some potential for a deal between Israel and Saudi Arabia? There's already a deal. It doesn't have to be official on a piece of paper. Okay, so then they'll be able to write the newspaper articles about it. Then all the T's will be crossed and the I's will be dotted. But Israeli planes can fly over Saudi airspace. Israel is sharing intelligence probably with the Saudis right now. They have this shared enemy in Iran and they're working together on that course. There's investments going back and forth, maybe not in Saudi Arabia, but in the Gulf.

9:24The Israelis are active in the Gulf and the Gulf states are active in Israel. So is there going to be some kind of official deal? Probably not. Probably Saudi Arabia wants to hold out for some goodies from the United States. And maybe they think they're going to get more goodies from either a Harris administration or a Trump administration. So why waste time with the Biden administration to put their signatures on the piece of paper? But the piece of paper doesn't matter. The Saudis and the Arab states in general are working with Israel against Iran. The bigger question here, and I can't figure out why people aren't talking about this more, the looming threat here to Israel in all of this is not really Iran.

10:01And it's not even the Sunni Arab states. It's Turkey. Because Turkey is the big Sunni Arab power that is rising. It's a Mediterranean power. It has the most advanced military, or excuse me, it has one of the most, one of the biggest militaries within NATO. Obviously, the United States takes first, and there's a couple other countries. But Turkey has a formidable military of its own. It's got troops on the ground in Syria. It's got troops on the ground in Iraq. It is thinking about a new neo-Ottoman sort of empire. And if you look at what Erdogan and Turkey has said around what's happening with the Palestinians.

10:32It has criticized Israel harshly. There was even a moment a couple months ago where Erdogan was talking about building up military strength so in the future Turkey could prevent Israel from doing these sorts of things to the Palestinians. So that's the sort of quiet elephant in the room that nobody's talking about. But the Saudi-Israel deal, for my intents and purposes, that's basically done. And nothing that's going to happen right now to the Palestinians is going to change the fundamentals. It may change the messaging, it may change the things on the surface, but they're working together. That's all we really need to know.

11:04So Jacob, speaking of Turkey, returns in Turkey have actually been pretty decent since the invasion of Ukraine and through the 2022 sell-off in equity markets, we had pretty decent returns in Turkey as well. So how do you view Turkey as a macro case, given the turbulence in the Middle East, but also given the role they play in the Ukrainian-Russian relations here? Yeah, I've been bullish Turkey for a couple of years now, and that has borne out pretty well. And some of that was luck. I mean, I was worried about the Turkish lira had been circling around the toilet bowl for quite some time. And Erdogan's, let's call them unorthodox monetary policies weren't helping very much.

11:44But as a result of that, and as a result of the foreign investors fleeing for the exits, you had the sort of normal Turkish investor thinking, well, what am I going to do with my money? Because Turkish fixed income is not going to work with the lira depreciating. appreciated. The Turkish government cracked down on crypto. There was a surge of interest in Bitcoin and other crypto, but the Turkish government shut that off. So really, if you were an average everyday Turk, your only chance at preserving some of your wealth was going after Turkish equities. And the boom in Turkish equities that we've seen in recent years is in large part because the average Turkish citizen has been putting money into the Turkish market.

12:19And when Erdogan won his election and got done with the sort of populist goodies that he needed to hand out for his election and pivoted back to orthodox monetary policy, oh, suddenly the foreign investors liked it too. So that's the sort of accidental part of this that went well. What's not accidental is that Turkey is really the only modern industrial economy in the Middle East, and it's stealing market share from Europe in terms of manufacturing. It has open relations with China and wants those open trade relations to continue. The Russia-Ukraine war, it really stayed on the sideline. It's been supporting Ukraine in some senses, but it's kept, you know, diplomatic ties open with Russia.

12:56It still imports a lot of energy and food from Russia. But at the same time, they're investing in being self-sufficient in food. They've got lots of interesting offshore gas plays that they're dealing with. So you start stacking things on top of each other. And Turkey looks like a really, really good opportunity. It's a country that over and over again, if you have powers that are based around what is today Istanbul, what used to be Constantinople, those are usually extremely wealthy, extremely powerful trading nations that impact how the world is going. And I think Turkey is in the very beginning stages of growing back into that power.

13:29So, Jacob, this turbulence in the Middle East, a rising oil price soon to be seen at the pump as well in the U.S., how will it impact the U.S. election? I guess that's the big question now. Is this current turbulence an issue for Kamala's ticket? I don't think it is. I mean, oil prices have been relatively subdued, not just on this, but we had disruptions in Libya. I think there's more than enough oil out there to meet demand. The Saudis are telling you that, like the way that everybody is behaving is telling you that oil probably has further to go down, which was a surprise to me at the start of the year.

14:06But the data is fairly unambiguous here. So I'm not expecting any huge increase when it comes to that. If we're talking about domestic sort of energy issues or things like that that might affect Kamala, and maybe we'll get to this in a little bit. I mean, we've got a hurricane that is barreling down on Florida. We've got the fallout from Hurricane Helene in North Carolina. Like those are things. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo.

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15:11Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Things that I think might affect sort of the economic ticket more. We also had the port strike, which it seems there's a temporary reprieve there. They're going to push it to January. That might have really impacted the election and how things were going to go. But I just don't really see it. And I also don't think that it's going to affect Kamala in terms of the support of the left. because even though there are some passionate wings on the left in the United States that are pro-Palestinian and don't like what the US government is doing in its support of Israel, they're gonna vote for Trump, the guy who moved the embassy to Jerusalem, who was the architect of the Abraham Accords, who is much more hawkish and has a tight relationship with Netanyahu.

16:05There's not another option here. So you can either sit out or you can say, okay, Kamala is going to be a little bit better than for Trump. So I just don't see, you know barring some huge Israeli escalation um which is it's hard to imagine that there's going to be some huge back and forth that actually affects the U.S. election I don't see how the Middle East drama is going to affect either Kamala's chances or Trump's chances I don't think that's what Americans are voting on speaking of this election Jacob I I had this question from a client of mine earlier today and I actually think it's a tricky question to answer right now Do you think the market has got a base case for that election already priced in?

16:43Or is it a 50-50 play? I mean, if Mr. Market is smarter than all of us, hats off to Mr. Market. But I don't know how you can have a base case right now. This election is super tight. All of the polling data, well, first thing, when you're thinking about polling data, polling data is backward looking. So it's only giving a snapshot of weeks ago. We don't have that much data with Kamala. because membership came to the race relatively late and polls are all over the place. Some are saying that Harris is leading across the board. Some are saying it's much tighter in the swing states. You hear people with private polling saying, actually Trump is looking like the odds on favorite here.

17:19So hats off to anybody who feels like they have a base case here. But at least for me and what I've been advising with my clients is keep powder dry because I don't know exactly which direction this is going to go in. And if the polls are anything close to right, it's gonna be very, very close. That's the only thing I feel relatively comfortable saying. And even that might not be true. Maybe we'll see a landslide in the swing states for Kamala based on all the crazy things that Trump has done over the past couple of months. So yeah, I don't see the base case. So it's hard for me to believe that anybody else out there has the base case.

17:53So Jake, one of the things that I've discussed with other pundits on Real Vision, but also with clients of mine over the past couple of months of relatively weak labor market data in the US is whether this phenomenon of hesitancy in terms of hiring patterns is related to the upcoming election. And seen from Europe, and I'd like your take on this as well, it seems like the outcome space is wider than ever, basically, ahead of this election. You have two candidates with an extreme distance between them. So assuming you were a business leader and had to take a decision on hiring people right now, would you await this election?

18:32And could this be the explanation why we've seen so weak labor markets? So two things I've been telling my clients and I've been speaking at various conferences and saying, first of all, I'm not sure that there's that much difference. If you prepare for a protectionist, deglobalizing, demagogic ideologue, no matter who wins, you're going to be prepared. There is no free trade candidate here. The one difference is that Kamala Harris will be much friendlier to U.S. allies and partners. So maybe you won't have U.S.-Europe trade friction. The U.S.-Mexico relationship will be better. But generally speaking, we're talking about degrees.

19:06We're not talking about major changes in policy. So I actually don't think that there's that big of a difference in terms of preparation. The other thing, and this gets back to your question about the labor market, when I'm talking about the United States right now, I don't put up election polls and I don't put up labor market data. The first chart that I put up is what do U.S. demographics look like? What is the change in the rate of population growth in the United States? And it's close to zero. It's lower than it's ever been in the last hundred years. So that accounts for World War I. It accounts for World War II.

19:37And I think the labor data, it's not showing us some of the things that are actually happening in the real economy. Because yes, maybe there's some soft hiring around the edges here. But if you are a laborer, if you're in construction, if you're in agriculture and you're trying to find someone to go out in the field and pick apples or whatever you're harvesting, that labor is incredibly expensive and it's only going up. And it's going up because the population is going down, because you've got all these bottlenecks around immigration. Immigration has become a political firestorm between the two candidates and nobody really has a good answer.

20:09And if we're really, really thinking macro, I think the lower levels of the U.S. economy, the ones where people are not reporting how much they're getting paid to the Bureau of Labor Statistics, that labor is getting more scarce and it's getting more expensive. And I think that's affecting things up and down the chain. So no, I wouldn't read anything about the election into the labor data and people waiting around to see what's going to happen. I think this is a broad structural thing that's been happening since COVID, since immigration completely went nuts. And the United States has just not metabolized that problem yet.

20:39And I think we're seeing some of that now going further up the chain. We've obviously seen a similar syndrome in Europe and in China. So fading demographics, the outlook looks even weaker if you look at the southern parts of Europe and China on demographics. So where does this demographic issue leave the outlook for the U.S. also in terms of macro and investments? This is one of the ways I differ from other geopolitical or macro strategists that you'll normally talk to. They'll use demographics like a crystal ball. And just like political polling, demographics is a backward-looking figure. So I'm not saying ignore it, but things can change very quickly.

21:23A good example of what I mean, Poland had arguably the worst demographics in the European Union up until Russia invaded Ukraine. And now there has been a surge of immigration into Poland of young Ukrainian women and children. And suddenly, Poland has some of the best demographics in the entire European Union. So things can change very quickly. The United States and China, I'm less worried about. The United States because the United States is not short on people who want to come to the country. It just doesn't have the legal mechanisms and the law enforcement mechanisms to let them in. But if they ever stopped squabbling in Washington, the problem is not that they have to attract the people.

21:58The problem is getting them in and integrating them. That's the source of American power going back centuries. That's what the United States is supposed to be good at. China obviously doesn't have immigrants trying to break the door down. What China has is hundreds of millions of people living in the interior of the country who Xi Jinping and the Communist Party want to redistribute wealth to. So you're not going to get a sudden burst in total fertility rate in China, although you saw how they went with the one-child policy. If they come out with a three-child policy, okay, it'll take 10, 15 years, but these things can change incredibly quickly.

22:30It's why I don't use demographics like a crystal ball for predictive reasons. But the point about China is they have hundreds of millions of people within the interior of the country. If you could integrate them into the Chinese economy more fully, okay, like that's a shot in your arm while you wait for the total fertility rate to normalize. And maybe while you push policies that are going to allow people to have more children. The situation for Europe at large or for Russia, for example, is a little more grim because it's not clear to me what are the unorthodox ways of dealing with the demographic problem.

23:02Japan is also in this camp, although Japan is allowing for more immigration from places like Indonesia. It's also ahead when it comes to things like robotics and AI and using those things in the context of their economy. So those are harder cases. And it doesn't mean that it's impossible. There are certainly tons of immigrants who would like to come to Europe. It's just generally harder for the Europeans to integrate immigrants into their population. Japan, like I said, is trying to attract immigrants, is setting up more attractive terms for foreign visitors and foreign investors and foreign entrepreneurs or tech nomads to come and work there.

23:36So you start looking around and you start piecing in also, what is robotics? What is AI going to help us do in this context? I'm less worried about shrinking demographics in that sense, but different countries have different strengths and are going to have to deal with different problems in order to sort through it. Speaking of China, we've been through a couple of eventful weeks out there, especially in financial markets in China. We've seen one of the largest rallies I can remember, especially during such a short time span. and on the first day of the announcement of this stimulus package i wrote an article called bringing chopsticks to a gunfight again from china and currently i look like comical ali when i refer to that but jacob overall are they doing too little too late fill us in a little bit on this chinese stimulus plan well i mean we're recording here on october 8th and the hang hang sen was down almost 10 so i'm not sure that you look as foolish as you think that you look.